Byron Energy Net Reserves (at 30 June, 2014)

Transcription

1 Energy AUSTRALIA Byron Energy Ltd BYE AU / BYE.AX Market Cap Avg Daily Turnover Free Float A$100m US$0.1m 66.0% US$87.5m A$0.1m 95.20m shares Krista WALTER T E krista.walter@morgans.com.au Roger Leaning T E roger.leaning@morgans.com.au Share price info Share price perf. (%) 1M 6M 12M Relative -5.73% % % Absolute -4.35% % % Major shareholders % held Mr Doug Battersby 15.0 Mr Maynard Smith 10.7 Mr Charles Sands 6.6 Current Images in Action Byron Energy (BYE) has an experienced Gulf of Mexico (GOM) exploration team, with a significant position in shallow water GOM salt domes. The management has a track record of successfully drilling GOM wells (83% success rate) and creating shareholder value. BYE has certified Reserves, and operates a lower risk exploration model with a focus on low risk shallow water prospects with strong economics. The company will be drilling up to 2 wells in 2015, with one existing likely commercial discovery already and the share price will be highly leveraged to the outcome of future drilling results. Experienced team to drive shareholder value Directors and management have 150 years of collective Gulf of Mexico (GoM) experience, with a proven track record of drilling successful wells and creating wealth. Wells initiated by Byron executives have produced 22 mmbo and 263 bcf since 1992, with 71 producing wells from 86 attempts for an 83% success rate. Newly appointed director Bill Sack has a similar track record with an 80% success rate from 55 wells, producing 185 bcf and 4mmbo whilst running his former entity. Advanced Seismic unlocks potential BYE has utilised a newer seismic processing technique, Reverse Time Migration (RTM), to de-risk prospects. The advantages of RTM are that it better images the more complex structures such as salt domes. RTM has been successfully employed in the deep water GoM, A$0.69 Conviction Byron Energy Net Reserves (at 30 June, 2014) SPOTLIGHT Santos Basin in Brazil, and West Africa. Recent increases in computer processing power and capacity have made RTM economic on shallow water GoM plays. Attractive location The GOM has a history of production which has resulted in extensive available infrastructure and services; lower costs; well understood reservoirs and geology; and faster developments given nearness to market and availability of engineering. This can lead to faster evaluation and developments. Reserves base with upside potential Byron has 2P reserves of 4.79 mmbbl Bcf as certified by Collarini Associates, reducing risk. This is across only 4 of Byron s 7 projects, with additional upside potential from 3P Reserves and Prospective Resources plus additional permits. SOURCE: COMPANY REPORTS IMPORTANT DISCLOSURES REGARDING COMPANIES THAT ARE THE SUBJECT OF THIS REPORT AND AN EXPLANATION OF RECOMMENDATIONS CAN BE FOUND AT THE END OF THIS DOCUMENT. MORGANS FINANCIAL LIMITED (A.B.N ) AFSL A PARTICIPANT OF ASX GROUP

2 1. Company Overview Byron Energy Limited (BYE) is focused on the shallow water Gulf of Mexico (GOM), including projects that are located where previous discoveries and production have taken place, but where modern technologies have identified the potential for further recoverable hydrocarbons. Figure 1: Location of BYE leases SOURCES: COMPANY REPORTS As of 30 June 2014, Byron has net 3P reserves of 6.9 MMBbls oil and 89.3 Bcf gas. In addition, Byron has prospective resources (net to Byron) of MMBbls oil and Bcf gas. The independent reserves estimates were prepared by Collarini Associates, based in Houston, Texas, USA. BYE has a 100% working interest (WI) and 81.25% net revenue interest (NRI) across the majority of its seven projects. Figure 2: BYE Net Reserves (June 30, 2014 update) projects in the Gulf of Mexico (Figure 1) With the exception of Grand Isle Block 95 (GI 95), BYE s permits are all associated with salt domes. Reserves have been assigned to South Marsh Island 6 (SMI 6), SMI 70/71, Eugene Island (EI) 63/76, and GI 95 project areas. Further image processing and evaluation work is ongoing across its other projects which may lead to reserves being assigned. To date, BYE has drilled in only the SMI 6 project areas. However, previous drilling in its permit areas by others plus the seismic work and evaluation has resulted in reserves being assigned. The 7 projects areas include: South Marsh Island 6 South Marsh Island Blocks 70/71 Eugene Island Blocks 63/76 Oil (mmbbl) Gas (Bcf) Total (mm) Proved Probable P (P + P) Possible P (P + P + P) Prospective

3 Grand Isle Blocks 63/72/73 Grand Isle Block 95 Eugene Island Block 190/191/210 East Cameron Blocks 154/155 and West Cameron Block Experienced team with a track record of success Byron has an experienced team with 150 years of collective Gulf of Mexico experience. The team have a proven track record of drilling successful wells and creating wealth. Wells initiated by Byron executives Doug Battersby, Maynard Smith and Prent Kallenberger (prior to founding Byron) have produced 22 mmbo and 263 bcf of gas since This production was achieved through 71 producing wells, which were drilled from 86 attempts (83% success rate). Between 2001 and 2012 Aurora Exploration, led by Bill Sack generated 70 prospects which led to 55 wells being drilled of which 44 were productive (80% success rate), producing 185 bcf gas and 4 mmbo as of In line with the prior record of wealth creation, Directors are also large shareholders Doug Battersby (15%), Maynard Smith (11%), Prent Kallenberger (1%), Charles Sands (7%) and Paul Young (1%) are aligned with shareholders through equity interest in Byron Energy. The management has indicated it is targeting a sale of assets, company, or exit point in a 3 to 5 year time frame. Figure 3: Management Corporate Track Record Exit Multiple of Company Date Invested Exit Date Exit Mechanism investment Petsec (ASX) GOM Focus Darcy Energy (Private) GOM Focus Eastern Star Gas (ASX) CSG Focus September, X Sale of shares on ASX Maynard Smith and Doug Battersby joined PETSEC in 1990 and Prent Kallenberger started in 1992; Petsec 2P reserves increased from zero in 1990 to 255 bcfe (42.5 mm) in 1997, 66% gas and 34% oil, with peak production of 100 mmcf/d and 9000 bopd; MS/DB obtained board approval to sell their shares in the second half of Sapex (ASX) Conventional + CSG June, 2000 December, X November, X 2007 October, X Private sale to IB DAIWA Maynard Smith and Doug Battersby formed DARCY in 2000 and raised approximately $US 5 million before Darcy was acquired by IB Daiwa for $US 57.5 million in December Share swap with Santos SANTOS acquired 100% of Eastern Star Gas (ESG) in November 2011 via a recommended Scheme of Arrangement under which ESG shareholders received Santos shares for every 1 ESG share held. Based on Santos share price at time of the offer of $A13.23, the transaction valued ESG at A$.90 per ESG share of $924 million. Doug Battersby co-founded ESG and was a non-executive director until October 2008 Cash/Share offer by Linc Energy Linc Energy acquired 100% of SAPEX via a recommended Scheme of Arrangement for cash consideration of A$0.72 per share and A$0.50 per option, valuing SAPEX at A$104.1 million. Doug Battersby co-founded SAPEX Aurora Exploration, LLC X Private asset sales (Private) GOM William Sack Co-founded Aurora Exploration, LLC in 2000, (AEX) a private entity focused on generating and drilling GOM exploration opportunities, and under his leadership created substantial growth and monetized investments via multiple corporate level assets sales.

4 1.3 Use of technology advanced RTM seismic (source: company website) BYE utilises Reverse Time Migration (RTM) processing to better understand the subsurface particularly around salt domes. Seismic processing has evolved from relatively simple algorithms to more advanced at present with more powerful and cost effective computing. Each improvement in migration has yielded more accurate seismic images for interpreters to work from. Recently, the RTM processing algorithm has been employed to provide a better method of imaging steeply dipping sedimentary beds and complex salt bodies. RTM has only become economical in the last five to eight years due to advances in computing power. Sub-salt exploration in Brazil and in deep water Gulf of Mexico has utilised RTM processing in the past five years, which has led to some significant discoveries. In the past two to three years several seismic contractors have begun applying RTM processing to the shelf areas of the Gulf of Mexico with improved results compared to the PreStack Depth migrations which were considered state of the art in the early 2000s. Byron has initiated proprietary processing of data over a number of their properties in the Gulf of Mexico. Figure 3: Byron Energy Reverse Time Migration SOURCES: COMPANY REPORTS 1.4 Business Strategy BYE executives have previously created businesses successfully off the back of application of new seismic technology. Their focus area has been and remains shallow water Gulf of Mexico, which management believe offers significant advantages to the company, as they believe the Gulf of Mexico (source: company website): is a prolific producer of oil and gas; has significant proved and unproved reserves of oil and gas as well as significant potential for further hydrocarbon discoveries; has extensive, accessible oil and gas exploration, development and production infrastructure and expertise; offers a short development cycle and rapid payback, and with the advantages of recently produced seismic coverage, a well-established

5 and stable administration with one landowner, Bureau of Ocean Energy Management (BOEM). Byron s strategy is complemented by a number of key inputs. Firstly, its experienced team of oil and gas exploration personnel with a successful track record. Secondly, an inventory base of low risk drillable prospects; and thirdly, the capacity to grow its asset portfolio in the shallow waters of the Gulf of Mexico. 1.4 SMI 6 Salt Dome recent drilling Byron recently drilled one well with two side-tracks in the SMI6 salt dome targeting the G20 as the primary reservoir sand. The rig encountered mechanical issues at several times over the drilling of the wells and therefore never reached the primary target zones. However, two shallower sands were intersected and discovered light hydrocarbons. The company estimates that these two zones are able to be economically developed at current prices. In addition, the well was successful in correlating the RTM seismic processing image with the subsurface, thus helping to de-risk the mapped zones and future wells. The company intends to drill a follow up well on the SMI 6 salt dome in 1HCY15. The company believes a development could potentially be funded via debt (including convertible debt), equity, partial sell-down or a combination thereof. 1.5 Future work plan Over the next two years, BYE will likely drill at least 4 wells and develop its SMI 6 discoveries. While an exact timeline is uncertain until well results are known, a potential activity scenario is presented with the 2017 and 2018 drilling having the potential to be prioritised depending on the outcome of seismic processing and evaluation Drill 2 wells, 1 follow up on SMI 6 and 1 on SMI SMI 6 Production, drill 2 wells (assuming a successful #2 well) 2017 GI 95 drilling 2018 EI 76 drilling 2. Company Financials 2.1 Financial Overview Byron had US$1.6m in cash and US$1.2m in undrawn loan facility at 30 September With plans to drill at least two wells in 2015 at costs of ~US$9m each, we believe that BYE will need to raise funds. For the purposes of this report, we assume the company raises equity of A$30m to cover the costs with potential for a third well. We also assume the options are exercised at A$0.50ps, to raise A$18.5m. 2.2 Capital Structure The Byron company structure comprises: A total of 144,378,640 ordinary shares fully paid on issue of which 19,450,518 are restricted; 36,995,984 unlisted options on issue of which 13,687,083 are restricted, with a strike price of $0.50 per share and an expiry of 31 December, 2016; Debt of US$1.2m at 30 September 2014 Cash of US$1.6m as at 30 September 2014

6 3. Key Risks Oil and gas exploration and development risk Byron s future success depends on the success of its exploration drilling program. Results may differ materially from estimates Interpretations and estimates of Byron s oil and natural gas reserves, including the estimates of ratio of oil to gas in certain circumstances, and the costs and timing associated with developing those reserves may not be accurate. Financing Risk. BYE has a low cash balance and will be dependent on additional capital raising and farm-outs to joint venture partners in order to meet exploration commitments and potential development capital. Key personnel. BYE is a small company where all of the value creation to date has been the result of a very small team of people. Loss of any key member of this group could set back the company s plans. Speculative and high risk. In our view Byron shares are speculative and suited only to institutional and sophisticated professional investors who understand the high risks associated with exploration companies. 4. Reserves and Valuation Summary BYE reserves are assigned for SMI 6, SMI 71, EI 76 and GI 95 projects covering six leases. The remaining leases do not have reserves assigned as the projects are at a very early stage of exploration. The company also has prospective resources, which have been assigned to exploration prospects which are beyond any previous wells. Figure 4: BYE Reserves and Resources and the Associated PV10 (30 June 2014) SOURCES: COMPANY REPORTS 4.1 Theoretical Risked Valuation Breakdown A$1.02ps Our risked asset valuation of US$167m is the equivalent of US$7.65/ of 3P reserves, excluding net cash and corporate. We have assigned a probability of success (POS) to the company published Reserves PV10 values at 100% for Proved, 60% for Probable and 15% for Possible and then 90% POS overall. This highlights the lower risk associated with SMI 6 with its higher 1P Reserves based on drilling already done. These are hypothetical valuations, with the market likely attributing higher success factors with successful drilling and testing results and lower POS if a

7 well is unsuccessful. However, with some Reserves assigned, the exploration risk is lower vs. traditional offshore exploration wells. We would expect that successful drilling will move 2P to 1P, thereby also adding value via de-risking. Recent nearby transactions that enable a relative valuation of BYE assets on a $/ or $/acre basis are limited, however we detail them for reference below. We have not modelled a development related to BYE reserves or projects given uncertainty in timing, flow rates and production profile, capital expense and success rates. Figure 5: Risked PV10 value of net reserves Project 1P (mm) 2P (mm) 3P (mm) Prospective Resource 1P PV10 (US$m) 2P PV10 (US$m) 3P PV10 (US$m) Prospective PV10 (US$m) Unrisked A$ps (3P) SMI $26.70 $ $ $ $ % $80.64 $0.40 SMI 70/ $22.20 $36.70 $59.90 $87.80 $ % $30.94 $0.15 EI 63/ $0.00 $20.10 $25.20 $ $ % $11.54 $0.06 GI $1.70 $70.30 $ $79.10 $ % $43.73 $0.22 SUBTOTAL $50.60 $ $ $ $ % $ $0.83 Net Cash and Corporate $43.74 $0.19 TOTAL $1.85 $ $1.02 Blue Sky Total (incl. Prospective 15% POS) $5.78 $ $1.61 Diluted Shares on Issue (m) AUD / USD exchange rate 0.87 POS Risked US$m A$ps Figure 6: BYE PV10 values per barrel 1P 2P 3P Prospective $/ PV $/ $/ $/ SMI 6 $7.60 $21.74 $21.86 $13.08 SMI 70/71 $30.68 $36.56 $39.37 $49.18 EI 63/76 $0.00 $22.43 $20.53 $12.42 GI 95 $0.78 $8.08 $8.54 $11.22 Mean $13.02 $22.20 $22.58 $ Summary of a PV10 value The company has published the PV10 associated with the reserves which represents the Reserves Assessor calculated present value of future oil and gas revenues net of estimated expenses of a development of the reserves utilising a 10% discount rate and company supplied assumptions on costs and oil and gas pricing. The PV10 does not take into account corporate taxes and overheads, company specific WACC, or company funding needs and may not represent the actual market value. We note that only 4 projects have reserves assigned from a total of 7 projects, and therefore further upside may eventuate as the projects are de-risked through seismic evaluation and further exploration work, or via drilling. 4.3 The total blue sky valuation The blue sky value includes the total Prospective Resource, without consideration for projects not yet evaluated. We understand the Prospective Resource represents the pure exploration targets in the mapped permit areas around the salt domes. The risked total Prospective Resource is on a 15% POS, given that there is no recovery associated with the number or any nearby drilling and therefore we assume that it is a higher risk of recovering the full resource and achieving the PV10 value.

8 4.4 Transaction Values Two recent transactions have occurred in the shallow water Gulf of Mexico which may give some idea of value potential. Energy XXI acquired EPL Oil & Gas in 2014 for a deal totalling US$2.3B in value. EPL had ~20,000pd of production and Proved Reserves of 78.1 mm (71% oil). The deal equated to US$110,000 / pd or ~US$30/Proved. Fieldwood Energy also acquired Sandridge Energy s shallow water GOM assets for US$750m in early Sandridge had over 26,000 pd of production and Proved Reserves of 57.2 mm (51% oil). The deal equated to US$28,850/pd or US$13.11 / Proved. The two deals indicate a significant range, likely partly a reflection of the different oil content in the reserves. Figure 7: Deal value breakdown US$/pd US$/1P US$/2P US$/3P Energy XXI / EPL 110, % Fieldwood/Sandridge % BYE has ~32% oil in its 3P reserves, making comparisons difficult. However, we have shown the resulting BYE value at a number of thresholds for comparison, likely achievement of these values would include having a level of production and more significant de-risking, as planned by the company over the next 3-5 years. The Fieldwood comparables are highlighted. Our theoretical valuation is at ~a 20% discount to the 3P transaction multiple, which we believe highlights the early stage of the permits and the lower oil to gas ratio in the reserves. % oil Figure 8: BYE Reserves at comparable BYE mm US$m $ $83.43 $ $ $ A$/sh (0.87 AUD/USD) A$ $0.96 $0.41 $1.64 $0.90 $ Overall Value Impression High Risk, High Upside With early successful drilling, and validation of BYE s seismic interpretation, we see significant upside potential via de-risking. Further potential exists from permit areas not yet evaluated, and the market may attribute further value to potential and prospective resources as drilling success rates are established. If early wells are dry, the share price downside is significant. These are theoretical valuations, with the market likely attributing higher success factors with successful drilling and testing results and lower POS if a well is unsuccessful. However, with some Reserves assigned, the exploration risk is lower vs. traditional offshore exploration wells. We would expect that successful drilling will move 2P to 1P, thereby also adding value via de-risking. We would anticipate that GI 95 is more gas prone and needs added infrastructure for a development, given its lower $/ PV10 valuation by the reserves assessor. We also understand that the full cost of a development, including a production platform, is likely assigned in the 1P PV10 of SMI 6, reducing the present value $/. However, the 2P reserves are much more valuable because those hydrocarbons can likely be developed by tying into that platform, thus saving capex. Therefore, if drilling is successful and highlights that 2P reserves are likely recoverable, there is considerable de-risking for SMI 6 project area.

9 5. Board of Directors & management team The Board has a mix of specialist oil and gas industry and commercial experience. Three directors have spent all of their careers in the oil and gas industry and have participated in a number of successful new projects. Board of Directors Non Exec Chairman Managing Director Director & COO Executive Director Non-executive Director Non-executive Director Mr. Doug Battersby (MSc Petroleum Geology and Geochemistry) Mr Maynard Smith (BSc Geophysics) Mr Prent Kallenberger (BSc Geology, MSc Geophysics) William Sack (BSc. Earth Sci./Physics, MSc. Geology, MBA) Mr. Charles Sands (BSc) Mr. Paul Young Petroleum geologist with over forty five years technical and managerial oil and gas experience. Co-founded Eastern Star Gas, SAPEX and Darcy Energy. Formerly Technical Director at Petsec Energy (15% shareholding in company). Geophysicist with over forty years technical and managerial experience predominantly in Gulf of Mexico. Co-founded Darcy Energy and Byron. Chief Operating Officer with Petsec Energy ( ) (11% shareholding in company). Geoscientist with over thirty years experience in oil and gas. Generated prospects leading to the drilling of over 125 wells in the Gulf of Mexico and California. 12 years with Petsec Energy (Geophysical Manager and Vice President of Exploration ) (1% shareholder in company). Explorationist with 26 years experience in the Gulf of Mexico region in both technical and executive roles. Co-founder/Managing Partner of Aurora Exploration, LLC a private entity focused on GOM exploration, former Sr. VP Exploration with Bayou Bend Petroleum (a Lundin group TSX listed company) and previously served in various roles including VP Exploration & Joint Ventures with Petsec Energy. Former director of Darcy Energy. Thirty years of broad based business and management experience in the USA. President of A. Santini Storage Company of New Jersey Inc. Co-founder and executive director of corporate advisory business Baron Partners. Has been in merchant banking in Australia for more than 26 years. Director of Ambition Group, Australian Rural Capital. Former Chairman Peter Lehmann Wines and former director of Sapex.

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